The Budget: the 50p tax rate is a bomb that a brave Chancellor would defuse

George Osborne will no doubt have worked out that the 50p tax was the last and arguably greatest trick that Gordon Brown played on the Conservative Party. It repels entrepreneurs and raises no money – during Brown’s reign, Treasury civil servants had to fiddle the figures to claim otherwise. The former prime minister himself knew this tax to be an act of sabotage, which is why he waited until the final six weeks of his 13 years in Downing Street to implement it. It was intended to be a bomb planted under the public finances, and Brown bet that the Tories would not have the nerve to defuse it.

So far, everything is going according to plan. Osborne has said he wants to abolish it, but doesn’t feel able to just yet. As the old saying goes, nothing is more permanent than a “temporary” government tax. In fact, the Chancellor has increased the top rate to the equivalent of 52p by raising National Insurance. The resulting pain is acute and tangible: a brain drain has begun, the effects of which were described by business leaders in yesterday’s letter to the Telegraph. Almost all Tories know that Britain is hurting, but cutting taxes for the rich is seen as a political impossibility. The Chancellor is just where Brown wanted him.

A year ago, Osborne had a plan. Just before the next election, he would celebrate the elimination of the deficit by cutting taxes for everyone, including the abolition of the 50p tax. The world looks rather different now. Even the most optimistic Government forecasts show deficits lasting until at least 2017, and the debt burden only returning to pre-Brown levels by 2038, by which time Osborne will be celebrating his 67th birthday. The champagne is not so much being kept on ice, as in the deep freeze.

But even the Chancellor’s original plan was flawed, in that it accepted Brown’s false logic: that cutting the 50p rate is somehow a tax giveaway. As successive independent studies have shown, the tax costs money – estimates range between £500 million and £4 billion a year. This does not count the damage to Britain’s reputation as a business-friendly country.

Brown calculated that he had found the Achilles heel of the Conservative leadership: that they were sensitive about their personal backgrounds, and feared most of all the accusation that they were rich kids, out to help other rich kids.

In opposition, Osborne saw the 50p tax only as a political debate: no research was conducted to estimate how much Britain would lose. Now, he’s beginning to realise. A Treasury study currently underway still has too little data to draw any proper conclusions, but anecdotal evidence is flooding in. London is full of leaving parties for people heading to Dubai or Asia. A recent survey of millionaires by Skandia, a financial consultancy, found that just over half say they may emigrate. Of those thinking of leaving, high tax was the biggest factor. For a Government that collects £14 billion in tax from 14,000 millionaires, this is something of a concern.

The basic fact is that Britain is hugely dependent on a very small number of highly mobile taxpayers. The best-paid 1 per cent earn 13 per cent of salaries paid in Britain, but contribute 28 per cent of income tax collected – this is what you might call a “fair share”. After we published this fact in The Spectator last month, a minister told me he’d had no idea. “You guys in the press should be making this case more strongly,” he said. One might respond that, ideally, ministers would be making the case – and using it to explain why our current eat-the-rich mentality is so dangerous.

The argument is there to be won, and Osborne can do so in a radical Budget later this month. Most of the world’s 20 largest economies have deficits, but no one else has raised the top rate of tax by such an amount – some have decreased it, mindful that countries nowadays need to compete for people. Canary Wharf, a financial district of London where more tax is paid than anywhere else in Britain, is a modern-day Babel, where French, Chinese, Americans and South Africans speak the universal language of business. The most recent Sunday Times Rich List showed that 16 of the country’s 20 wealthiest individuals are immigrants. They can go as easily as they came.

In 1989, when the Rich List started, there were only 11 immigrants in its richest 100 – and Nigel Lawson had just cut the top rate from 60 per cent to 40 per cent. Britain quickly became a magnet for the world’s entrepreneurs and, over the next decade, the income tax share collected from the top 1 per cent soared. Lord Lawson may well be the most “progressive” Chancellor in British history; no one did more to ensure that the richest shouldered a greater share of the burden. This is what John F Kennedy described as the “paradoxical truth” of taxation: that “the soundest way to raise revenues in the long run is to cut the rates now”.

The best politicians can make, and win, this argument. The facts are on their side. George Osborne is widely regarded as one of the most gifted politicians the Conservative Party has produced in recent years. He has already won the argument over the deficit, to the extent that the public would be willing to stomach savings in the state budget far deeper than those actually being made. Cutting tax for the rich will always be unpopular, which is why it needs to be done early in a parliament. If the Tories are worried about the electoral price now, there will be even greater cause for concern as the election draws closer.

A window of opportunity has opened. The Liberal Democrats have a demand, and a reasonable one: raising the tax threshold closer to £10,000. This can be done, and financed by greater savings in state spending. Even Vince Cable accepts that the 52p tax doesn’t raise much money, so it could be replaced with something that does. There are many less harmful options: French-style super-VAT on luxury goods, for example. Even rattling a collection tin outside Canary Wharf underground station would raise more money. Anything is better than zero.

The Treasury is promising to publish its review into how much money has been raised, but the findings can’t be trusted. It will take years to disentangle the effects of the crash from those of a panicked tax rise. When California slapped a tax on its rich in 2001, its receipts plunged – 80 per cent of which was to do with disappearing millionaires. But how many emigrated, and how many saw their fortunes perish in the dot-com crash? It’s impossible to say. What you can say for sure is that Britain’s top rate of tax is now the fourth highest on the planet, which is unlikely to be an advantage in this globalised era.

It was precisely Gordon Brown’s greed for taxes that stopped him raising the top rate for those 13 years. During Labour’s one-candidate leadership election in 2007, he was challenged by an activist about his failure to do so. Don’t look at the rate, he replied, look at the rising proportion of tax collected from the richest. That’s how we get them. The 50p tax was only ever intended to be hung around Osborne’s neck, as a reminder of Brown’s lingering intellectual influence. This month’s Budget is the perfect time to end it.

Fraser Nelson is editor of 'The Spectator’